Blockchain technology has brought about an 80% change in business processes and a 20% technology implementation. It has proven itself to be an efficient foundation for innovative finance models which have resulted in an accelerated shift from traditional finance systems.
The blockchain's major appeal is that in its deployment, trust and authority in finance models created through it are decentralized and not vested in powerful central institutions.
While several leading companies have expressed willingness to use the blockchain system, these companies are now looking beyond the benefits of blockchain which include: better speed, lower costs, streamlined operations, and increased efficiency. The focus now is on the various problems of the blockchain which have stalled the widespread adoption of blockchain technology.
It has become increasingly clear that while blockchain is a world-changing technology, it's not a one size fits all solution to finance and other problems.
To environmentalists, Blockchain comes at a high environmental cost as it relies on encryption to provide its security while establishing a consensus over a distributed network. Blockchain requires complex algorithms to be run to “prove'' that a user has permission to write to the chain. This process requires large amounts of computing power and In 2020, Bitcoin's blockchain alone consumed energy equivalent to that used by 159 countries combined.
Another challenge to blockchain financing models is the lack of regulation in blockchain usage. Popular blockchain finance systems like Bitcoin are prone to market manipulation and scams. In May 2021, Bitcoin and BNB along with several other cryptocurrencies' prices witnessed a major dip which was influenced by a single tweet from top investor and scientist, Elon Musk. This has reinforced the demands for regulations that would protect users' investment in blockchain-based finance models.
Other issues that could arise from the lack of regulation of blockchain include; users losing their investments in wallets due to hacks on their wallets, dissolution of wallet-providing companies, and even government policies that shut down wallet providers.
Furthermore, one major problem associated with blockchain financing models is the immaturity of blockchain technology which has made users raise questions about its scalability.
Currently, several finance technologies like Legacy and Visa are known for their ability to process thousands of transactions per second. While top blockchain networks like Bitcoin and Ethereum do not compare in terms of transaction speeds. The bitcoin blockchain can only process three to seven transactions per second while Ethereum can handle approximately 20 transactions in a second.
This lack of scalability doesn't seem much of a bother to private blockchain networks, since the nodes in the network are intentionally designed to process transactions between trusted parties. Still, this doesn't solve the issue of scalability for users.
To address the problem of scalability, research is currently being carried out by blockchain experts on how the problem of scalability would be solved. On the other hand, some technologies have already been deployed to tackle the problem of transaction limits.
The Lightning Network is one interesting solution to blockchain's scalability. This involves the addition of a second layer to the main blockchain network to speed up transactions. Sharding also provides a solution. It groups subsets of nodes into smaller networks or ‘shards’ which are made responsible for the transactions specific to their shard. This Shard approach would show much promise if it is combined with the proof-of-stake consensus process. This would certainly improve the scalability of blockchain technology.
In addition, the lack of skilled developers also poses a problem to blockchain adopters. The developers skilled in blockchain are few in comparison to the organizations needing such skilled developers.
According to research, the demand for blockchain-related jobs has increased by almost 2000% between 2017 and 2020. Having a sufficient pool of qualified developers is a top industry concern. It would take time for newer blockchain developers to learn the blockchain technology. It would also take more time for these developers to stay updated on the ever-evolving blockchain technology.
Blockchain technology is also complex and not every end-user can appreciate its value because of this complexity. End-users would have to understand the principles of encryption and distributed ledgering behind blockchain. It doesn't matter if blockchain has gained more acceptance into various aspects of life, its complexity would still make it a great pill to swallow for many end-users.
Yet, in comparison to other problems faced by blockchain finance models, traditional finance institutions constitute a major obstacle to blockchain's adoption in global finance. Banks for instance make huge profits from playing the role of middlemen. So technology like blockchain threatens the continued existence of such financial institutions. Undeniably, there are still some benefits of traditional finance institutions. In comparison with blockchain financing models, the cost of using a traditional banking system is lesser for users as the cost is evenly distributed among users of such finance systems. However, blockchain financing models can eliminate the extra cost to users when it addresses the issue of scalability.
Still, traditional finance institutions' influences can not be easily ignored. These finance institutions pull much weight in terms of governmental backings and their influence could be used to minimize the effectiveness of blockchain deployed in finance models. Such influence could also be used to restrict blockchain technology availability while making it completely irrelevant.
For blockchain financing models to thrive, there would have to be measures put in place to ensure a standard global regulation, governmental support, and a widespread adoption or integration of technologies that would aid the scalability of blockchain-enabled finance models. These solutions would take time to be achieved and implemented and while that continues to be in the pipeline of blockchain developers, blockchain is expected to continue evolving.
Although it can't be ascertained how fast blockchain can evolve beyond the reach of its current limitations, one thing is sure, if there is a breakthrough in blockchain that can solve half its current challenges, there would be a more global adoption of blockchain in finance.
Reference
https://www.bernardmarr.com/default.asp?contentID=1354
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